INCOTERMS
INCOTERMS
INCOTERMS
When commercial traders enter into a contract for the purchase and sale of goods, they are free to negotiate specific terms of their contract. These terms include the price, quantity, and characteristics of the goods. Every international contract will also contain what is referred to as an INCOTERM (international commercial term). The INCOTERM selected by the parties to the transaction will determine which party pays the cost of each segment of transport, who is responsible for loading & unloading of goods, and who bears the risk of loss at any given point during a given international shipment. INCOTERMs also influence Customs valuation basis of imported merchandise. INCOTERMs are overseen and administered by the International Chamber of Commerce in Paris and are adhered to by the major trading nations of the world. There are currently 13 INCOTERMs in use, and they can be considered on the basis cited above.
Current INCOTERMs are described below:
Cost, Insurance & Freight (CIF)
Carriage & Insurance Paid To (CIP)
ExWorks (EXW)
The seller (exporter) makes the goods available to the buyer (importer) at the seller's premises. The buyer is responsible for all transportation costs, duties, and insurance, and accepts risk of loss of goods immediately after the goods are purchased and placed outside the factory door. The ExWorks price does not include the price of loading goods onto a truck or vessel, and no allowance is made for clearing customs. If FOB is the Customs valuation basis of the goods in the country of destination, the transportation and insurance costs from the seller's premises to the port of export must be added to the ExWorks price.
Free Carrier (FCA)
The seller (exporter) clears the goods for export and delivers them to the carrier and place specified by the buyer. If the place chosen is the seller's place of business, the seller must load the goods onto the transport vehicle; otherwise, the buyer is responsible for loading the goods. Buyer assumes ownership/risk of loss from that point forward and must pay for all costs associated with transporting the goods to the final destination.
Free Alongside Ship (FAS)
The seller transports the goods from his place of business, clears the goods for export and places them alongside the vessel at the port of export, where the transfer of ownership and risk of loss shift to the buyer The buyer is responsible for loading the goods onto the vessel (unless specified otherwise) and for paying all costs involved in shipping the goods to the final destination.
Free On Board (FOB)
The seller (exporter) is responsible for delivering the goods from his place of business and loading them onto the vessel of at the port of export as well as clearing customs in the country of export. As soon as the goods cross the «ships-rails» (the ship's threshold) the risk of loss/ownership transfers to the buyer (importer). The buyer must pay for all transportation and insurance costs from that point, and must clear customs in the country of import. An FOB transaction will read «FOB, port of export». For example, assuming the port of export is Boston, an FOB transaction would read «FOB New York». If CIF is the Customs valuation basis, international freight and insurance must be added to the FOB value.
Cost & Freight (CFR)
The seller (exporter) is responsible for clearing the goods for export, delivering the goods past the ships rail at the port of shipment and paying international freight charges. The buyer assumes ownership/bears risk of loss once the goods cross the ship's rail, and must purchase insurance, unload the goods, clear customs, and pay for transport to deliver the goods to their final destination. If FOB is the Customs valuation basis, the international freight costs must be deducted from the CFR price.
Cost, Insurance & Freight (CIF)
The seller (exporter) is responsible for delivering the goods onto the vessel of transport and clearing Customs in the country of export. He is also responsible for purchasing insurance, with the buyer (importer) named as the beneficiary. Transfer of ownership takes place as the goods cross the ship's rail. This if goods are damaged or stolen during international transport, the buyer owns the goods and must file a claim based on insurance procured by the seller. The buyer must clear customs in the country of import and pay for all other transport and insurance in the country of import. CIF can be used as an Incoterm only when the international transport of goods is at least partially by water. If FOB is the Customs valuation basis, the international insurance and freight costs must be deducted from the CIF price. A CIF transaction will read CIF, port of destination. For example, assuming that goods are exported to the port of Novorossiysk, a CIF transaction would read «CIF Novorossiysk».
Carriage Paid To (CPT)
The seller (exporter) clears the goods for export, delivers them to the carrier and is responsible for carriage costs to the named place of destination. Transfer of ownership occurs once the goods are transferred to the carrier and the buyer must insure the goods from that time on. If FOB is the Customs valuation basis, the international freight cost must be deducted from the CPT price.
Carriage & Insurance Paid To (CIP)
The seller transports the goods to the port of export, clears Customs, and delivers them to the carrier. From that point transfer of ownership shifts to the buyer. Seller is responsible for carriage and insurance costs to the named place of destination. The buyer is responsible for all costs, and bears risk of loss from that point forward. If FOB is the Customs valuation basis, international freight and insurance costs need to be deducted from the CIP price.
Delivered At Frontier (DAF)
The seller (exporter) is responsible for all costs involved in delivering the goods to the named point and place at the frontier. Transfer of ownership takes place at the frontier. The buyer must pay the costs and bear the risk of unloading the goods, clearing Customs, and transporting the goods to the final destination. If FOB is the Customs valuation basis, the international insurance and freight costs must be deducted from the DAF price.
Delivered Ex-Ship (DES)
The seller (exporter) is responsible for all costs involved in delivering the goods to a named port of destination. Upon arrival, the goods are made available to the buyer (importer) on-board the vessel. Therefore, the seller is responsible for all costs/risk of loss prior to unloading at the port of destination. The buyer (importer) must have the goods unloaded, pay duties, clear Customs and provide inland transportation & insurance to the final destination.
Delivered Ex-Quay (DEQ)
The seller (exporter) is responsible for all costs involved in transporting the goods to the wharf (quay) at the port of destination. The buyer must pay duties, clear Customs, and pay the cost/bear the risk of loss from that point forward. If FOB is the Customs valuation basis, the international insurance and freight costs, in addition to unloading costs, must be deducted from the DEQ price.
Delivered Duty Unpaid (DDU)
The seller (exporter) is responsible for all costs involved in delivering the goods to a named place of destination where the goods are placed at the disposal of the buyer. The buyer (importer) assumes ownership/risk of loss at that point and must clear Customs and pay duties and provide inland transportation and insurance to the final destination.
Delivered Duty Paid (DDP)
The seller (exporter) is responsible for all costs involved in delivering the goods to a named place of destination and for clearing Customs in the country of import. Under a DDP Incoterm, the seller provides literally door-to-door delivery, including Customs clearance in the port of export and the port of destination. Transfer of ownership occurs when the goods are delivered to the buyer, usually at his premises. Thus the seller bears the entire risk of loss until goods are delivered to the buyer's premises. A DDP transaction will read «DDP named place of destination». For example, assuming goods imported through St. Petersburg are delivered to Moscow, the Incoterm would read «DDP, Moscow». If CIF is the Customs valuation basis, the costs of unloading the vessel, clearing Customs, and delivery to the buyer's premises in the country of destination including inland insurance, must be deducted to arrive at the CIF value.
INCOTERMS
When commercial traders enter into a contract for the purchase and sale of goods, they are free to negotiate specific terms of their contract. These terms include the price, quantity, and characteristics of the goods. Every international contract will also contain what is referred to as an INCOTERM (international commercial term). The INCOTERM selected by the parties to the transaction will determine which party pays the cost of each segment of transport, who is responsible for loading & unloading of goods, and who bears the risk of loss at any given point during a given international shipment. INCOTERMs also influence Customs valuation basis of imported merchandise. INCOTERMs are overseen and administered by the International Chamber of Commerce in Paris and are adhered to by the major trading nations of the world. There are currently 13 INCOTERMs in use, and they can be considered on the basis cited above.
All the current INCOTERMs are described below:
Cost, Insurance & Freight (CIF)
Carriage & Insurance Paid To (CIP)
ExWorks (EXW)
The seller (exporter) makes the goods available to the buyer (importer) at the seller's premises. The buyer is responsible for all transportation costs, duties, and insurance, and accepts risk of loss of goods immediately after the goods are purchased and placed outside the factory door. The ExWorks price does not include the price of loading goods onto a truck or vessel, and no allowance is made for clearing customs. If FOB is the Customs valuation basis of the goods in the country of destination, the transportation and insurance costs from the seller's premises to the port of export must be added to the ExWorks price.
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Free Carrier (FCA)
The seller (exporter) clears the goods for export and delivers them to the carrier and place specified by the buyer. If the place chosen is the seller's place of business, the seller must load the goods onto the transport vehicle; otherwise, the buyer is responsible for loading the goods. Buyer assumes ownership/risk of loss from that point forward and must pay for all costs associated with transporting the goods to the final destination.
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Free Alongside Ship (FAS)
The seller transports the goods from his place of business, clears the goods for export and places them alongside the vessel at the port of export, where the transfer of ownership and risk of loss shift to the buyer The buyer is responsible for loading the goods onto the vessel (unless specified otherwise) and for paying all costs involved in shipping the goods to the final destination.
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Free On Board (FOB)
The seller (exporter) is responsible for delivering the goods from his place of business and loading them onto the vessel of at the port of export as well as clearing customs in the country of export. As soon as the goods cross the «ships-rails» (the ship's threshold) the risk of loss/ownership transfers to the buyer (importer). The buyer must pay for all transportation and insurance costs from that point, and must clear customs in the country of import. An FOB transaction will read «FOB, port of export». For example, assuming the port of export is Boston, an FOB transaction would read «FOB New York». If CIF is the Customs valuation basis, international freight and insurance must be added to the FOB value.
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Cost & Freight (CFR)
The seller (exporter) is responsible for clearing the goods for export, delivering the goods past the ships rail at the port of shipment and paying international freight charges. The buyer assumes ownership/bears risk of loss once the goods cross the ship's rail, and must purchase insurance, unload the goods, clear customs, and pay for transport to deliver the goods to their final destination. If FOB is the Customs valuation basis, the international freight costs must be deducted from the CFR price.
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Cost, Insurance & Freight (CIF)
The seller (exporter) is responsible for delivering the goods onto the vessel of transport and clearing Customs in the country of export. He is also responsible for purchasing insurance, with the buyer (importer) named as the beneficiary. Transfer of ownership takes place as the goods cross the ship's rail. This if goods are damaged or stolen during international transport, the buyer owns the goods and must file a claim based on insurance procured by the seller. The buyer must clear customs in the country of import and pay for all other transport and insurance in the country of import. CIF can be used as an INCOTERM only when the international transport of goods is at least partially by water. If FOB is the Customs valuation basis, the international insurance and freight costs must be deducted from the CIF price. A CIF transaction will read CIF, port of destination. For example, assuming that goods are exported to the port of Novorossiysk, a CIF transaction would read «CIF Novorossiysk».
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Carriage Paid To (CPT)
The seller (exporter) clears the goods for export, delivers them to the carrier and is responsible for carriage costs to the named place of destination. Transfer of ownership occurs once the goods are transferred to the carrier and the buyer must insure the goods from that time on. If FOB is the Customs valuation basis, the international freight cost must be deducted from the CPT price.
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Carriage & Insurance Paid To (CIP)
The seller transports the goods to the port of export, clears Customs, and delivers them to the carrier. From that point transfer of ownership shifts to the buyer. Seller is responsible for carriage and insurance costs to the named place of destination. The buyer is responsible for all costs, and bears risk of loss from that point forward. If FOB is the Customs valuation basis, international freight and insurance costs need to be deducted from the CIP price.
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Delivered At Frontier (DAF)
The seller (exporter) is responsible for all costs involved in delivering the goods to the named point and place at the frontier. Transfer of ownership takes place at the frontier. The buyer must pay the costs and bear the risk of unloading the goods, clearing Customs, and transporting the goods to the final destination. If FOB is the Customs valuation basis, the international insurance and freight costs must be deducted from the DAF price.
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Delivered Ex-Ship (DES)
The seller (exporter) is responsible for all costs involved in delivering the goods to a named port of destination. Upon arrival, the goods are made available to the buyer (importer) on-board the vessel. Therefore, the seller is responsible for all costs/risk of loss prior to unloading at the port of destination. The buyer (importer) must have the goods unloaded, pay duties, clear Customs and provide inland transportation & insurance to the final destination.
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Delivered Ex-Quay (DEQ)
The seller (exporter) is responsible for all costs involved in transporting the goods to the wharf (quay) at the port of destination. The buyer must pay duties, clear Customs, and pay the cost/bear the risk of loss from that point forward. If FOB is the Customs valuation basis, the international insurance and freight costs, in addition to unloading costs, must be deducted from the DEQ price.
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Delivered Duty Unpaid (DDU)
The seller (exporter) is responsible for all costs involved in delivering the goods to a named place of destination where the goods are placed at the disposal of the buyer. The buyer (importer) assumes ownership/risk of loss at that point and must clear Customs and pay duties and provide inland transportation and insurance to the final destination.
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Delivered Duty Paid (DDP)
The seller (exporter) is responsible for all costs involved in delivering the goods to a named place of destination and for clearing Customs in the country of import. Under a DDP INCOTERM, the seller provides literally door-to-door delivery, including Customs clearance in the port of export and the port of destination. Transfer of ownership occurs when the goods are delivered to the buyer, usually at his premises. Thus the seller bears the entire risk of loss until goods are delivered to the buyer's premises. A DDP transaction will read «DDP named place of destination». For example, assuming goods imported through St. Petersburg are delivered to Moscow, the INCOTERM would read «DDP, Moscow». If CIF is the Customs valuation basis, the costs of unloading the vessel, clearing Customs, and delivery to the buyer's premises in the country of destination including inland insurance, must be deducted to arrive at the CIF value.
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